Hearing for SoMoLend founder Klein will begin Monday

Candace Klein, founder and former CEO of SoMoLend. / The Enquirer

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Allegations of fraud against Candace Klein, the founder and former CEO of SoMoLend Holdings LLC, are “overboard and completely without merit,” her lawyer says in papers filed in advance of a hearing that starts Monday.

Michelle Casper’s brief offers the first publicly detailed response from Klein to allegations made by the Ohio Division of Securities last June.

It says Klein sold unregistered securities, misrepresented facts related to the sale of securities, committed securities fraud and acted as an unlicensed dealer or salesperson while running SoMoLend.

The case has cast national attention on crowdfunding, a practice in which members of the general public make loans and equity investments in small businesses, bypassing traditional lenders like banks. Klein launched SoMoLend, short for Social Mobile Local Lending, in 2011 as a digital platform to connect lenders with businesses that needed capital. A national advocate for crowdfunding, she was counting on the practice to help drive the startup’s growth.

Klein’s supporters say the state is targeting her because of its discomfort with crowdfunding, the rules of which are still being finalized.

In its pre-hearing brief, the state securities division said that it, the SEC and the Financial Industry Regulatory Authority informed Klein of the need for SoMoLend to be licensed and for the loans offered through its platform to be registered, but she ignored them. Just one of about 200 notes being offered on SoMoLend’s site was properly registered, the state said. It added that Klein or her lawyer told the division three times that no transactions were occurring on SoMoLend’s platform, when in fact they were.

The division is seeking an order for Klein to cease and desist from further violations of the Ohio Securities Act.

Casper, however, said in her brief that Klein’s fundraising for SoMoLend was lawful, that she did not mislead investors and that SoMoLend was not selling securities. Instead, Casper said SoMoLend was conducting loan transactions, which the state does not have jurisdiction to regulate. Casper also said that, because Klein no longer works at SoMoLend, there is no conduct from which she needs to cease and desist.

Casper’s brief also addresses inconsistencies between Klein’s public statements about SoMoLend’s financial results and the company’s actual performance between 2011 and 2013.

For example, at an October 2012 Silicon Valley Bank Showcase Event, Klein said SoMoLend had closed on 31 loans for just under 50 businesses. The loans, she said, totaled $3.5 million and generated $50,000 in revenue. At the time, the state says SoMoLend actually had closed on 13 loans for nine businesses totaling $94,000, which generated $3,404 in revenue.

Casper said Klein was including loans SoMoLend planned to service for another Klein startup, Bad Girl Ventures, in addition to loans that originated on SoMoLend’s website. Bad Girl Ventures is a microlending organization that helps female entrepreneurs obtain financing. Klein left Bad Girl Ventures in 2012 to focus on SoMoLend.

“She was ‘on the spot’ – she had to think fast on her feet, remember facts and figures as accurately as she could, and entertain the audience at the same time,” according to Casper’s brief. “It is not hard to understand that occasionally Ms. Klein misremembered facts and figures, occasionally got confused, or blended facts and events from her various businesses.”

Casper also rejected the division’s allegations that Klein’s presentations at these and other events amounted to a solicitation for investors in SoMoLend. Instead, Casper said the presentations were a chance for Klein to promote the responsible use of crowdfunding and promote the SoMoLend brand.

Casper said Klein raised money from investors through a “tightly controlled” process. Many SoMoLend investors have publicly supported Klein. They said the state targeted her because of her crowdfunding advocacy and that they were not misled about the company’s performance.

“If the investors don’t believe they were misled or harmed, where is the fraud?” investor Carlin Stamm told The Enquirer last year.

In its brief, the state said showing harm or damages is not necessary to bring securities fraud charges.

The state also said SoMoLend’s board of managers and management team warned Klein about the importance of making accurate statements to the public and correcting past false statements, but that she ignored the warnings.

The hearing, which was set to start last week but was postponed until Monday, is scheduled to last 10 days. The state is expected to rule within 30 days of the hearing’s completion. No criminal penalty could result.

The division earlier this month reached a separate settlement with SoMoLend, which Klein left in August. The startup conceded to unregistered sales of SoMoLend securities, selling unregistered securities through its platform and failing to secure the necessary federal and state licensure as a broker-dealer.

The division said it made no finding on its allegations that SoMoLend engaged in securities fraud, made fraudulent financial projections, made false statements on past and current performance, or made false and misleading statements regarding the nature and extent of its business relationships. ■